TBM’s Point of View: Terrorism Risk and Commercial Property Insurance
By: Ryan M. McLaughlin, CPCU, CIC | Vice President/Account Executive, Michael Ballew | Managing Partner
Terrorism and gun violence are unfortunately a tragic reality of the times. Active Shooters, Domestic and International Terrorism, and Work Place Violence have entered the lexicon in a way we never would have imagined 20 years ago. Grappling with the emotional and physical pain from a violent attack is hard enough, but we also have to be cognizant of the economic fallout that will result when an attack occurs. Understanding the insurance protection that is available, along with the options and limitations of insurance coverage, is important in making sure your business is properly protected.
Navigating the ever-evolving landscape can be difficult and confusing. Not only are businesses working to protect their customers and employees, but they are also left wondering what the financial implications could be in the wake of an attack. Do I have coverage? How much?
What does it cover? What role does the federal government play when an attack occurs? The past 20 years has been a whirlwind of insurance carriers and the government trying to address these questions. It can be confusing to try to parse through the political and legal minutia that dominates this discussion. However, it is vitally important to understand these coverages in order to ensure businesses can survive should an attack occur.
Prior to the September 11th attack, terrorism coverage was not a topic often discussed. Coverage existed at essentially no cost as long as an attack didn’t fall within the language of the war exclusion which is standard on nearly all policies. Given that “war” must be related to actions of a military force directed by a sovereign power, private organizations saw little to no exposure that could fall within that framework. The scale of September 11th quickly changed the calculus. The government declared the attack an “act of war” which immediately got carriers and organizations concerned about how the policy should and would respond. It was ultimately agreed that the attack was not the action of a sovereign power, however a spotlight was suddenly thrust onto an enormous exposure that carriers had previously waved. The result was a race by carriers to get exclusionary language approved as quickly as possible. By January of 2002, nearly all carriers, including the Insurance Service Office (ISO), included a terrorism exclusion on their policy forms going forward. Many of these exclusions were thrown out for being too broad, but the ones that survived generally agreed upon the following thresholds:
- If an incident caused more than $25M of total loss including Business Interruption losses within the United States, the entire incident would be excluded on the Property Policy
- If an incident caused more than $25M of total loss OR 50 or more deaths or serious injuries, the incident would be excluded on the General Liability Policy
- Any incident involving Nuclear, Biological or Chemical release would be excluded on either
Now that Terrorism was being excluded, businesses had to figure out what to do to address this new exposure that threatened to put them out of businesses should another attack occur. They looked to the insurance marketplace, but solutions were scarce and far too costly. Insurance carriers didn’t have actuarial data to efficiently price a product that consumers would be willing to purchase, nor were they particularly anxious to jump into an environment with so many new question marks. As a result, the federal government stepped in with the Terrorism Risk Insurance Act of 2002.
The Terrorism Risk Insurance Act, known as TRIA, was designed to bridge the gap until insurance carriers were able to develop an insurance product to address this complicated exposure. The idea was that insurance would automatically include coverage for “certified acts of terrorism” that had eclipsed a certain threshold. Insurance carriers would disclose the premium being charged for this coverage to their customers, who could opt out of coverage if they desired.
The premium would be a fraction of what the exposure demanded because the federal government would provide a backstop to share in any losses that reached a certain threshold. Since TRIA was put in place, the private marketplace hasn’t developed as quickly as was hoped and TRIA was reauthorized and updated in 2005, 2007, and 2015. Since its original inception, there have been increases to the entry point of the federal government as well as broadening of coverage to include domestic terrorism. Today TRIA, now identified as TRIPRA 2015, includes the following features:
In order to be labeled a “certified act of terrorism”, the event must meet the following criteria:
- The event must cause property and casualty losses of at least $5M
- The event must be violent or dangerous to human life, property or infrastructure
- The event must cause damage either within the United States or to an air carrier or vessel on the premises of a United States
- The intent must be to coerce the United States population or to affect the conduct of the United States
- The determination of whether an incident qualifies as a “certified act of terrorism” is made by the Secretary of Treasury and cannot be appealed
Once an event is labeled a “certified act of terrorism” the government response is as follows:
- Even though it is a certified act of terror at $5M in damage, the government will not begin to reimburse insurance carriers until losses reach $180M ($200M in 2020)
- After the $180M threshold is hit, each individual insurer is responsible for a deductible equal to 24% of its premiums on TRIPRA eligible lines of
- The Treasury then reimburses insurers 81% of their loss above the deductible (80% in 2020)
To date, ZERO events have been certified under TRIPRA or its predecessors. That means the following events did not meet the definition: Boston Marathon, Las Vegas, Dayton Ohio, Walmart El Paso, Gilroy Garlic Festival, Virginia Beach, Santa Fe High School, or Parkland Fl. TRIPRA is scheduled to expire on December 31st, 2020.
So with all that being said, what is actually covered?
The primary lines of coverage, and those eligible for TRIPRA, are the Property, General Liability and Workers Compensation lines of coverage. These are the areas where property damage and loss of life will have a direct impact. Property and General Liability allow businesses to opt out of coverage, however coverage for terrorism is required on all Workers Compensation policies. For an event that does not qualify as a “certified act of terrorism”, coverage continues to exist on standard policies. Be it an active shooter, domestic terrorism, or foreign terrorism; if it does not fall within the TRIPRA guidelines, for the most part, it is covered.
Of course, it wouldn’t be insurance, if there weren’t exceptions.
- Nuclear, Biological or Chemical release (NBCR) is being excluded by most carriers. If an exclusion doesn’t exist TRIPRA will include coverage as well, but this is becoming few and far between. Therefore, if there is an NBCR exclusion on the policy, there will be no coverage for either certified or non-certified acts of
- War is also still excluded. If it is determined that an attack is carried out by a military force directed by a sovereign power, the Property and General Liability policies will not provide
- TRIPRA currently only applies until December 31st, 2020. After that, most policies will revert back to the $25M / 50 Deaths exclusions that were approved in the wake of September 11th.
Another issue is that businesses that are concentrated in big cities, or are seen as targets of terrorist organizations, are seeing non-certified acts of terrorism exclusion being incorporated into their policies. This coupled with the impending expiration of TRIPRA makes the standalone terrorism marketplace more important than ever.
Standalone policies are beginning to pop up in a way they were intended to nearly 20 years ago. They are sometimes less expensive than TRIPRA and fill a void that is critical to those at the greatest risk of a terrorist attack. Standalone policies tend to have a much broader definition of terrorism than TRIPRA and there is no need for government certification. Policies are rated off of total property values at risk, the location of the risk (Is it New York City or Des Moines, Iowa), and what they do (Is it a bakery, abortion clinic, or habitational risk). While coverage is widely available through several carriers, high target risks are modeled similar to property risks in wind prone areas. It can be difficult to find standalone coverage for high target risks.
Here is a side by side comparison of TRIPRA vs. standalone terrorism:
|Standalone Terrorism||TRIPRA 2015|
|Broad definition of terrorism including coverage for political, religious and ideological purposes||To Certify: Must have $5M in loss to property or humans and intent to coerce US population or government. Act must be Certified by the Secretary of Treasury in consultation with the Secretary of Homeland Security and the US Attorney General|
|Includes any act which is Certified by the US Government under TRIPRA (but does not require Certification)||
Losses under $5M across all industries / classes will not be Certified. There will be no indemnity for losses to Insured’s under this
|Clients can choose limit, deductible, and which properties are to be covered.||Industry wide losses in a calendar year over the TRIPA cap will result in proportional settlement of claims|
|Structured to meet client’s coverage needs and budget||
Typically, all locations have to be covered –
to policy limit – resulting in higher premiums
|Extended to include Act of Sabotage||Terrorism only – Sabotage is not addressed by TRIPRA|
|Can provide coverage for locations outside of US||Covers US locations only|
|No sunset clause based on TRIPRA Act||
TRIPRA 2015 is set to expire 12/31/2020. If TRIPRA doesn’t renew, insureds with TRIA coverage will have no coverage for
terrorism post expiration
|Generally, more price competitive|
Broader Political Violence perils coverage (War, Civil War, Strikes, Riots, Civil Commotion, Malicious Damage, Insurrection, Rebellion, Revolution, Coup D’Etat, Mutiny) available for all international
Additional products, such as active
assailant, NCBR and terrorism liability, can be included
|Recognized by lenders as a preferred alternative to TRIPRA|
A gap exists within the current structure of terrorism coverage with regards to what exactly is covered after a loss. While damage to property and the bodily injury are critical to rebuild and save lives, there are still costs that standard insurance still does not address. As a result, we have seen Active Shooter policies pop up to help fill the void left within standard policies and TRIPRA.
Active Shooter policies apply to situations where a person is trying to cause harm in a populated area. Unlike standalone terrorism, the intent does not need to be known in order for coverage to be triggered. Active Shooter policies can provide Property and Legal Liability coverage, but also provides coverage for reputational harm to the business as well as crisis management, counseling, etc.
While Active Shooter policies fill an important gap, there are exclusions to look out for that can greatly dampen the impact of the policy. For one, terrorism is often excluded on Active Shooter policies. This can cause a gap in valuable coverage that was not intended by the business purchasing the insurance. It is also important to look out for casualty threshold limits, employee exclusions, vehicle exclusions and mental anguish exclusions that can water down the coverage being provided.
Navigating the constantly changing landscape of Terrorism and Active Shooter insurance can be complicated and confusing. However, if businesses understand the motivations and constraints that exist in both the political and insurance marketplace, it becomes easier to understand how to best address an exposure that is continuing to grow and evolve. Knowing the coverage a business has and, more importantly the coverage they don’t have, can determine a businesses’ ability to survive. At TBM, we pride ourselves on providing you with the expertise and ability to understand the market and secure you the best coverage options. As your partner, we will continue to closely monitor carrier pricing, keeping you informed to avoid any unexpected outcomes. We are, of course, always available to discuss any concerns you may have.